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FA - Chapter 7

BUSI 2550

10/31/2018

Managing Risk

Risk Management Process
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As project progresses toward completion, risk declines (since critical issues are
solved) and cost impact of a risk increases
Proactive process (not reactive) to ensure surprises are reduced and negative
consequences are minimized
External risks/threats such as inflation, market acceptance, exchange rates, gov
...

Risk breakdown structure – hierarchal depiction
of project risks by risk category/subcategory that
identifies areas and causes of potential risks
Risk Profile – questions that address traditional
areas of uncertainty
o Recognize strengths and weaknesses of
firm
o Address both technical and management
risks
Input from customers, sponsors, subcontractors, vendors and other stakeholders is solicited in
risk identification

Step 2 - Risk Assessment
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Scenario Analysis – technique for analyzing risks where team assess significance of each risk in
terms of:
o Probability
o Impact
Impact scales need to be assessed in terms of project priorities

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FA - Chapter 7

BUSI 2550

10/31/2018

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Documentation for risk assessment:

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Risk severity matrix – basis for prioritizing which risks to assess
o FMEA equation (using a five-point grading scale for all 3 dimensions)
 Impact X Probability X Detection = Risk Value

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Probability Analysis
o PERT (program evaluation and review technique) provides a macro perspective by
looking at overall cost and schedule risks
 Focus on likelihood of timely project completion instead of individual events
 Assumes statistical distribution for each activity duration, stimulates network
using random number generator
...
Projects use parallel processes in case
one fails
Risk avoidance – changing project plan to eliminate risk/condition
 EX: moving a concert indoors to eliminate threat of inclement weather
Transferring Risk – passes risk to another party
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Contractors must
be capable of absorbing risk
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Useful for low-probability, high-consequence
risks such as acts of god
 BOOT (Build-Own-Operate-Transfer) is when host countries transfer financial
risk of ownership until project is complete and capabilities proven
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difficulties can be
solved
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Identify, assess possibility/impact, response and
contingency funds
4 responses to an opportunity
o Exploit – seeks to eliminate uncertainty to ensure it definitely happens
o Share – allocate some or all ownership of opportunity to another party which is best
able to capture it to benefit the project
o Enhance – action is taken to increase probability and/or positive impact
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 Inaccurate time and cost estimates
 Technical unknowns
 Unstable scope
 Problems not anticipated
Divided into 2 funds for control purposes
o Budget reserves – cover identified risks
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Allocated to risks associated with total project
 Cover major unforeseen risks
 Management reserves are established AFTER
budget reserves
 Controlled by PM and owner of project (upper
management)
o These reserves are ONLY activated when risk occurs
...
Each risk should be assigned/shared by owner, PM and
contractor or person responsible for line of work package

Change Control Management
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3 categories for changes
o Scope changes in design or additions
o Implementation of contingency plans, when risk occurs, changes baseline costs and
schedule
o Improvement changes suggested by project team
Change management systems – process for authorizing/documenting changes in project scope
o Designed to accomplish the following:
 1 - Identify proposed changes
 2 - List expected effects of changes on schedule and budget
 3 - Review, evaluate and approve/disapprove changes formally
 4 - Negotiate/resolve conflicts of change, conditions and cost
 5 - Communicate changes to parties affected
 6 – Assign responsibility for implementing change
 7 – adjust master schedule and budget
 8 – track all changes that are to be implemented
Define communication and decision-making process used to evaluate and accept
changes 
Change request forms – log to track proposed changes 
Change control system must be integrated with WBS and baseline
Benefits of change control system:
o Costs of changes maintained in a log
o Responsibilty for implementation is clarified
o Effect of changes is visible to all parties involved
o Implementation of change is monitored

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